U.K. government to nationalize Northern Rock

AlistairBarr

SAN FRANCISCO (MarketWatch) -- The U.K. government said on Sunday that it will nationalize Northern Rock PLC after the mortgage lender almost collapsed last year as the subprime crisis turned into a global credit crunch.

The surprise decision makes Gordon Brown's British government and taxpayers in the country the new owners of the struggling company.

The government said it will run Northern Rock (NRK) temporarily until it can find a buyer.

Northern Rock shares will be suspended before trading starts on Monday and the government will buy the stock and the company's assets, Chancellor of the Exchequer Alistair Darling said in a statment. An independent "valuer" will work out how much compensation investors will get, he added.

Northern Rock grew quickly into one of the largest mortgage lenders in the U.K. by relying on securitization -- repackaging most of the loans it originated into securities and selling them on to institutional investors. But that source of financing dried up when the U.S. subprime crisis hit Europe.

That forced the company to borrow emergency money from the Bank of England. When customers found out about the lifeline, many withdrew their savings in the first bank run in Britain for roughly a century.

The British government, including Chancellor Darling, had been in talks with potential bidders for Northern Rock, including a consortium led by Virgin Group Ltd., private-equity group Olivant Advisers Ltd. and Northern Rock's board. But those offers stalled last month because of uncertainty over financing.

"In current market conditions, we do not believe that they deliver sufficient value for money for the taxpayer," Darling said in a statement on Sunday. "Under public ownership the Government will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty." Read the full statement.

Customers

Northern Rock said on its Web site that customers will be unaffected by nationalization.

To avert a broader financial meltdown last year, the U.K. government guaranteed customer deposits at Northern Rock -- and any other U.K. financial institution facing the same problems.

Northern Rock and the government said on Sunday that those guarantees remain in place.

"Your savings with Northern Rock continue to be safe and secure, protected by the Government guarantee arrangements," the lender said. "The terms and conditions of your mortgage, savings and other products remain unchanged. All branches, call centres and other operations remain open for business as usual."

Government bailouts

Northern Rock becomes the latest lender to be saved by a government bailout in the wake of the subprime crisis.

In late July, German bank IKB Deutsche Industriebank AG (806330) was bailed out by state-owned KfW Group. Less than three weeks later, rival Sachsen LB succumbed to a $23 billion rescue by a group of German state-owned savings banks.

Indeed, IKB got another one billion euros of support from the German government last week, Darling noted on Sunday.

Financial-services companies around the world have taken $100 billion of subprime-related write-downs so far, he added. Citigroup Inc.
C, -1.05%
Merrill Lynch
MER, -3.69%
and UBS AG
UBS, -0.98%
have been among the hardest hit and have turned to government-run investment funds in the Middle East and Asia to rebuild capital.

In the U.S., the Federal Reserve has slashed interest rates and tried to inject more money into the financial system through its so-called discount window. Authorities have also started a Treasury Auction Facility, which allows financial institutions to by-pass the discount window and borrow money more directly.

Taxpayer risks and rewards

The U.K. government said it tried to find a private-sector solution to Northern Rock's problems, but the offers it got left taxpayers too exposed and didn't provide a big enough share of any future returns, Darling explained on Sunday.

The Virgin proposal would have brought in new management and created a new brand, but taxpayers would only have seen any share of the private sector's return if the value of the business to its investors had reached at least 2.7 billion pounds, Darling said.

The offer from Northern Rock's board of directors had similar drawbacks and other disadvantages; bringing in less new capital and relying on government guarantees for new retail deposits for longer, Darling said.

Nationalizing Northern Rock will give taxpayers the chance to benefit from all gains if the lender is sold in future -- in return for bearing all the risks from current market uncertainty, he added.

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